19 Important GST points while finalizing balance sheet
Currently every business organization is engaged in finalizing books of accounts and
preparation of Balance Sheet for the financial year 2017-18. This financial year is divided
into two indirect taxes provisions namely, pre-GST (Excise, Service Tax and VAT) and
post-GST. This being the first financial year since GST implementation, it becomes
important to understand the legal provisions under GST law while finalizing books of
accounts and preparation of Balance Sheet. Therefore, in order to safeguard the interest of
the business organizations and provide some idea regarding GST audit preparation, I am
taking this opportunity to discuss the following important GST points while finalizing
Balance Sheet:
1. Reconciliation of sales / other income as per books of accounts with GSTR-1 /
GSTR-3B outward liability – During any audit, any officer / auditor is going to rely on value
reported in CA certified books of accounts and therefore, it is highly advisable to reconcile
value of outward supply shown in books of accounts with the value reported in GSTR-1 /
GSTR-3B. It may be noted that value as per books of accounts and value reported in GST
returns cannot be matched due to some of the following GST legal provisions:
a. Inter-state stock transfer is treated as outward supply though it is not a sale transaction;
b. Recovery from employees is treated as outward supply though it is not a sale
transaction;
c. In many cases, companies are charging GST on free samples / FOC supply which is not
reported as sale;
d. Any amount recovered from vendor on account of penalty is treated as outward supply
though it is not a sale transaction.
2. Reconciliation of GSTR-3B & GSTR-1 & subsequent adjustment / rectification of
returns – In few cases, I have observed that there is a difference between value of outward
supply reported in GSTR-3B and value of outward supply reported in GSTR-1. This may
happen due to changes in transaction at the later stage or any other reason. Logically value
of outward supply should be matched and therefore, if there is any difference, then in that
case, it would be advisable to rectify the differential value at the time of filing GSTR-1 /
GSTR-3B for the subsequent month(s).
3. Reconciliation of ITC credit ledgers & GST liability ledgers – Logically speaking, ITC
closing balance as on 31 March 2018 should match with ITC balance reflected on GST
portal under input tax credit ledger and cash ledger (like PLA balance).
4. Classification of goods / services and respective rate – Verification is advisable
mainly in case of composite supply. In such a case, company is required to classify such
supply and GST rate pertaining to principal supply of goods or service.
5. Matching of ITC on imported goods with ICEGATE – Government system has started
matching of IGST value of a particular month reported in GSTR3B (under IGST credit on
imported goods) with IGST value reflected on ICEGATE portal. This value may not match
due to certain reasons, mainly in case of month end import consignments. In such a case,
reconciliation with IGST value as reflected on ICEGATE portal is going to play a vital role.
6. Admissibility of input tax credit (ITC) – While finalizing ITC, it is advisable to go
through the “negative list” given u/s 17(5) of CGST Act, 2017. In other words, ITC is
available on all such goods / services which are used in the course of business except list
of goods / services given u/s 17(5) of the CGST Act, 2017.
7. Verification of “place of supply” to check whether correct GST is charged –
Verification is advisable mainly in cases where “Bill To” person is different than “Ship To”
person. In such a case, “place of supply” is location of the “Bill To” person rather than
location of the “Ship To” person.
8. Reverse charge liability in case of goods / services – It is advisable to reconcile value
reported in GSTR-3B with respective expense ledger. For example, transport expenses for
GTA, legal expenses / professional fee for Legal service etc.
9. Verification of “Other Income” ledger – It is advisable to go through every transaction
reflected in “Other Income” ledger to confirm as to whether GST is applicable on any of
such transaction for which tax invoice is not prepared. For example, penalty / damages
recovered etc.
10. Supply of services free of cost to branches located to other States – As per
Section 25 of the CGST Act, 2017 read with clause 2 of Schedule – I to the CGST Act,
2017, any support given by head office to its branches / factory is to be treated as “outward
supply” and accordingly, IGST will be applicable. In such a case, companies are definitely
not preparing any commercial invoice however, as per above legal provisions, tax invoice is
required to be prepared and IGST liability needs to be paid.
11. Non-availment of ITC in case of FOC receipts – As per Section 7 of the CGST Act,
2017, GST is not required to be charged in case of supply of free samples or FOC.
However, it is seen that many companies are charging GST on free sample or FOC supply
for easy compliance of Rule 42 of CGST Rules, 2017 (i.e. non-requirement of reversal of
ITC on free sample or FOC supply). If any company has received any goods as free sample
or under warranty or FOC along with tax invoice of the supplier, then in that case, it would
be advisable not to claim input tax credit since there is no question of making payment to
the vendor, which is one of the pre-condition of availment of credit.
12. Creditors more than 6 months (180 days) – As per the proviso to Section 16(2) of the
CGST Act, 2017, company is required to make payment of basic value plus GST to the
respective supplier within a period of 180 days from the date of tax invoice. It may be noted
that if such payment is not made within 180 days from the date of tax invoice, then in that
case, input tax credit availed against such tax invoice is required to be reversed (by adding
output tax liability) along with interest.
13. Adjustment of advance in earlier month – Upto 14 November 2017, GST was
payable even on receipt of advance against goods. In such a case, GST liability was
required to be reduced at the time of raising tax invoice in the subsequent month(s). It is
seen that in few cases, companies have inadvertently not reduced GST liability and paid full
GST amount as mentioned in tax invoice which has resulted in excess payment of GST.
Such excess payment can to be adjusted in financial year 2018-19 at the time of filing
GSTR-3B of any month.
14. Any foreign payment made (apart for import of goods) for which CA Certificate is
obtained – all foreign payments excluding payments against import of goods may attract
IGST towards import of service under reverse charge.
15. Any recovery from employees – Recovery of any amount towards transport charges,
mobile expenses, notice pay, canteen expenses etc. would attract GST. Such recovery is to
be treated as outward supply and GST is applicable at the appropriate rate. However, since
employer-employee are related parties, valuation will play a vital role.
16. Any value of goods written off in the books – as per Section 17(5)(h) of the CGST
Act, 2017, if any company writes off any value of goods (whether raw material or WIP or
finished goods), in such a case, respective ITC needs to be reversed.
17. Sale of used cars – In case of sale of used cars, Compensation Cess was required to
be paid apart from GST. Such Compensation Cess was payable upto 24 December 2017.
I have observed that many companies have paid GST at appropriate rate at the time of
sale of company owned cars however, Compensation Cess has remain unpaid.
18. Reversal of ITC in case of exempted / non-GST supply – As per Section 17(1) and
17(2) of CGST Act, 2017 read with Rule 42 of CGST Rules, 2017, companies are required
to reverse input tax credit of common goods / services used for providing taxable as well as
exempted supply. Such reversal is required to be made as per the formula given under
Rule 42 of CGST Rules, 2017 on proportionate basis.
19. ITC on pre-paid expenses – It is seen that many companies have paid certain amount
in the financial year 2017-18 which is pertaining to services to be received during the
financial year 2018-19. Such expenses are treated as “pre-paid expenses”. For example,
lease line expenses, rent, insurance etc. It is seen that companies have claimed ITC on
such services since tax invoices are booked and payment is made. However, one of the
pre-condition of availment of taking credit is that such service is received. In case of prepaid
expenses, service is not actually received and therefore, this would amount to excess
availment of credit.
The above list is certainly not the exhaustive list. It is just an attempt to cover as many as
GST related points to be considered while finalizing Balance Sheet and for GST audit
preparation.
Currently every business organization is engaged in finalizing books of accounts and
preparation of Balance Sheet for the financial year 2017-18. This financial year is divided
into two indirect taxes provisions namely, pre-GST (Excise, Service Tax and VAT) and
post-GST. This being the first financial year since GST implementation, it becomes
important to understand the legal provisions under GST law while finalizing books of
accounts and preparation of Balance Sheet. Therefore, in order to safeguard the interest of
the business organizations and provide some idea regarding GST audit preparation, I am
taking this opportunity to discuss the following important GST points while finalizing
Balance Sheet:
1. Reconciliation of sales / other income as per books of accounts with GSTR-1 /
GSTR-3B outward liability – During any audit, any officer / auditor is going to rely on value
reported in CA certified books of accounts and therefore, it is highly advisable to reconcile
value of outward supply shown in books of accounts with the value reported in GSTR-1 /
GSTR-3B. It may be noted that value as per books of accounts and value reported in GST
returns cannot be matched due to some of the following GST legal provisions:
a. Inter-state stock transfer is treated as outward supply though it is not a sale transaction;
b. Recovery from employees is treated as outward supply though it is not a sale
transaction;
c. In many cases, companies are charging GST on free samples / FOC supply which is not
reported as sale;
d. Any amount recovered from vendor on account of penalty is treated as outward supply
though it is not a sale transaction.
2. Reconciliation of GSTR-3B & GSTR-1 & subsequent adjustment / rectification of
returns – In few cases, I have observed that there is a difference between value of outward
supply reported in GSTR-3B and value of outward supply reported in GSTR-1. This may
happen due to changes in transaction at the later stage or any other reason. Logically value
of outward supply should be matched and therefore, if there is any difference, then in that
case, it would be advisable to rectify the differential value at the time of filing GSTR-1 /
GSTR-3B for the subsequent month(s).
3. Reconciliation of ITC credit ledgers & GST liability ledgers – Logically speaking, ITC
closing balance as on 31 March 2018 should match with ITC balance reflected on GST
portal under input tax credit ledger and cash ledger (like PLA balance).
4. Classification of goods / services and respective rate – Verification is advisable
mainly in case of composite supply. In such a case, company is required to classify such
supply and GST rate pertaining to principal supply of goods or service.
5. Matching of ITC on imported goods with ICEGATE – Government system has started
matching of IGST value of a particular month reported in GSTR3B (under IGST credit on
imported goods) with IGST value reflected on ICEGATE portal. This value may not match
due to certain reasons, mainly in case of month end import consignments. In such a case,
reconciliation with IGST value as reflected on ICEGATE portal is going to play a vital role.
6. Admissibility of input tax credit (ITC) – While finalizing ITC, it is advisable to go
through the “negative list” given u/s 17(5) of CGST Act, 2017. In other words, ITC is
available on all such goods / services which are used in the course of business except list
of goods / services given u/s 17(5) of the CGST Act, 2017.
7. Verification of “place of supply” to check whether correct GST is charged –
Verification is advisable mainly in cases where “Bill To” person is different than “Ship To”
person. In such a case, “place of supply” is location of the “Bill To” person rather than
location of the “Ship To” person.
8. Reverse charge liability in case of goods / services – It is advisable to reconcile value
reported in GSTR-3B with respective expense ledger. For example, transport expenses for
GTA, legal expenses / professional fee for Legal service etc.
9. Verification of “Other Income” ledger – It is advisable to go through every transaction
reflected in “Other Income” ledger to confirm as to whether GST is applicable on any of
such transaction for which tax invoice is not prepared. For example, penalty / damages
recovered etc.
10. Supply of services free of cost to branches located to other States – As per
Section 25 of the CGST Act, 2017 read with clause 2 of Schedule – I to the CGST Act,
2017, any support given by head office to its branches / factory is to be treated as “outward
supply” and accordingly, IGST will be applicable. In such a case, companies are definitely
not preparing any commercial invoice however, as per above legal provisions, tax invoice is
required to be prepared and IGST liability needs to be paid.
11. Non-availment of ITC in case of FOC receipts – As per Section 7 of the CGST Act,
2017, GST is not required to be charged in case of supply of free samples or FOC.
However, it is seen that many companies are charging GST on free sample or FOC supply
for easy compliance of Rule 42 of CGST Rules, 2017 (i.e. non-requirement of reversal of
ITC on free sample or FOC supply). If any company has received any goods as free sample
or under warranty or FOC along with tax invoice of the supplier, then in that case, it would
be advisable not to claim input tax credit since there is no question of making payment to
the vendor, which is one of the pre-condition of availment of credit.
12. Creditors more than 6 months (180 days) – As per the proviso to Section 16(2) of the
CGST Act, 2017, company is required to make payment of basic value plus GST to the
respective supplier within a period of 180 days from the date of tax invoice. It may be noted
that if such payment is not made within 180 days from the date of tax invoice, then in that
case, input tax credit availed against such tax invoice is required to be reversed (by adding
output tax liability) along with interest.
13. Adjustment of advance in earlier month – Upto 14 November 2017, GST was
payable even on receipt of advance against goods. In such a case, GST liability was
required to be reduced at the time of raising tax invoice in the subsequent month(s). It is
seen that in few cases, companies have inadvertently not reduced GST liability and paid full
GST amount as mentioned in tax invoice which has resulted in excess payment of GST.
Such excess payment can to be adjusted in financial year 2018-19 at the time of filing
GSTR-3B of any month.
14. Any foreign payment made (apart for import of goods) for which CA Certificate is
obtained – all foreign payments excluding payments against import of goods may attract
IGST towards import of service under reverse charge.
15. Any recovery from employees – Recovery of any amount towards transport charges,
mobile expenses, notice pay, canteen expenses etc. would attract GST. Such recovery is to
be treated as outward supply and GST is applicable at the appropriate rate. However, since
employer-employee are related parties, valuation will play a vital role.
16. Any value of goods written off in the books – as per Section 17(5)(h) of the CGST
Act, 2017, if any company writes off any value of goods (whether raw material or WIP or
finished goods), in such a case, respective ITC needs to be reversed.
17. Sale of used cars – In case of sale of used cars, Compensation Cess was required to
be paid apart from GST. Such Compensation Cess was payable upto 24 December 2017.
I have observed that many companies have paid GST at appropriate rate at the time of
sale of company owned cars however, Compensation Cess has remain unpaid.
18. Reversal of ITC in case of exempted / non-GST supply – As per Section 17(1) and
17(2) of CGST Act, 2017 read with Rule 42 of CGST Rules, 2017, companies are required
to reverse input tax credit of common goods / services used for providing taxable as well as
exempted supply. Such reversal is required to be made as per the formula given under
Rule 42 of CGST Rules, 2017 on proportionate basis.
19. ITC on pre-paid expenses – It is seen that many companies have paid certain amount
in the financial year 2017-18 which is pertaining to services to be received during the
financial year 2018-19. Such expenses are treated as “pre-paid expenses”. For example,
lease line expenses, rent, insurance etc. It is seen that companies have claimed ITC on
such services since tax invoices are booked and payment is made. However, one of the
pre-condition of availment of taking credit is that such service is received. In case of prepaid
expenses, service is not actually received and therefore, this would amount to excess
availment of credit.
The above list is certainly not the exhaustive list. It is just an attempt to cover as many as
GST related points to be considered while finalizing Balance Sheet and for GST audit
preparation.
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